A doctor, a lawyer and a CPA walk into an actuary’s office…
They met back in Kindergarten in 1971. They each declare to the actuary that they are unencumbered by rank-and-file staff members and that they want to establish a defined benefit plan to contribute the maximum for 2020 and beyond.
The doctor explains that on 1/1/2020, he switched from being a W2 employee of the hospital to being 1099’ed. He was excited to be on his own now so that he could establish a plan(s) for his own benefit (and self-direct his own investments, of course)! His net earnings from self-employment were $750,000 in 2020.
The lawyer has a PLLC taxed as an S-corporation that pays him W2 of $250,000 in strong years and $130,000 in down years. Back in 2009, during the recession, his W2 had dropped all the way to $60,000. Thankfully 2020 was a strong year, so he paid himself $250,000 and maxed out his SEP.
The CPA, who branched off from a Big-4 accounting firm in 2017 to start his own S-corp, was well read and had been taking advantage of mega backdoor Roth contributions in his solo 401(k) plan. First, he’d maximize his deferrals. Then, he’d add an additional $36,000 of MBDRoth, which happened to represent 1/6th of his W2 wage.
The actuary, only having time to design one plan, chose to help the professional whose defined benefit plan would permit the largest 2020 contribution.